__economic thinking about sports__

Luxury Tax Paid by Yankees and Tigers

2008 December 23

by Phil Miller

The New York Yankees (surprise, surprise) have to pay MLB’s luxury tax this year. So do the Detroit Tigers.

The New York Yankees not only failed to make the playoffs, they were hit with their highest luxury tax in three years. The Yankees were assessed a $26.9 million tax by the commissioner’s office on Monday, up from $23.9 million last year and their biggest bill since paying nearly $34 million for 2005. The Detroit Tigers, who also failed to qualify for the postseason, are the only other team that must pay tax and owe $1.3 million to the commissioner’s office.

While the Yankees pay at a 40 percent rate for the amount over $155 million, the Tigers pay at a 22.5 percent rate because they exceeded the specified threshold for the first time.

This year’s figure brings the Yankees’ total tax to $148.3 million in the six seasons since it began – 90 percent of the total.

Before this year, the only other teams to pay were the Boston Red Sox, who owed $13.9 million for exceeding the threshold in four seasons, and the Los Angeles Angels, who paid $927,000 in 2004.

The Biz of Baseball gives us a handy table showing us who has paid and how much since 2002. Article XXIII of the current collective bargaining agreement describes the so-called competitive balance tax. Might as well call it the Yankees tax.

More fun with numbers.: suppose the Yankees exceed the tax threshold in every year of of CC Sabbathia’s (7 years $161 million) and AJ Burnett’s (5 years $82.5 million) contracts. Further suppose the salary payments are made in equal installments over the lives of the contracts, the Yanks pay the top luxury tax rate of 40%, and face a discount rate of 5%. Then the after-tax amount they’ll pay for these players is a discounted $286.3 million. To put this in perspective, Hank Steinbrenner could have bought the Tampa Bay Rays franchise for $290 million or the Florida Marlins franchise for $256 million (based on the Forbes franchise values for 2008).

Cross-posted at Market PowerUpdate: Dennis Coates notes in the comments that the Yanks have signed Mark Texeira to an 8 year $180 million contract. Updating my numbers, that puts the Yanks’ present value of the contracts plus tax of CC, AJ, and Tex at $490 million. For that price they could have bought the storied Cardinals, the Phils, or one of 22 other franchises.